Enabling offshore wind and connecting countries

September 28, 2011, Bloomberg New Energy Finance

A small often unsung yet vital group of companies stand to benefit from the gradual proliferation of offshore wind farms and further moves to link national grids via interconnectors. Mike Scott throws light on the subsea cable industry and its importance in shaping future power networks.

The offshore wind turbine is one of the most visible symbols of the efforts being made to
increase the proportion of renewable energy in the energy mix. But while the giant turbines garner all the attention, there is a complementary market worth billions that goes largely unnoticed.

The offshore wind industry and efforts to join up electricity markets across borders would not be possible without the companies that make and install them to fulfil their potential.

The €2.8bn sector is dominated by three companies – Prysmian of Italy, which has 33% of the market, infrastructure giant ABB, with 20% and French group Nexans with 18%. Germany’s NKT has an 11% market share, with NSW, a subsidiary of General Cable of the US, taking a further 5%.

Reflecting the current geographical focus of offshore wind and interconnection projects, the market is currently overwhelmingly focused on Northern Europe – about 75-80% of subsea cables are sold in Europe, according to Domenico Gerace, commercial manager for high voltage energy at Nexans.

The sector is set to see strong demand growth over the next few years thanks to efforts to expand the number of wind farms in the North Sea, the Irish Sea and the Baltic Sea and as a result of the push to create a pan-European electricity market. These drivers have been strengthened this year by Germany’s decision to bring forward the retirement of its nuclear fleet and to step up the amount of power it gets from renewable sources, particularly wind from theNorth Sea.

“There are currently 300-odd projects being developed or in planning in the North Sea and the Baltic, along with a number of interconnections,” says Beverley Walker, head of offshore renewables at WSP Environment and Energy. “If you are a high-voltage cable manufacturer, you will be rubbing your hands. The market will be extremely healthy going forward.”

While we are in the early stages of rolling out wind projects, demand for subsea cables is likely to be about 800km per year, says Fraser Johnston, offshore wind analyst at Bloomberg New Energy Finance, rising to 1,000km per year from 2012-2014.

Up to now, most of the cables linking wind farms to the shore have been high-voltage AC but in future, there will be more HVDC cables as projects move further offshore. “Anything up to 50km uses AC because it is the most cost-effective way to do it,” says Joe Corbett, head of technical services at Mainstream Renewable Power. “Anything above 80km will be more economical using HVDC and for distances in between, it depends on the specific conditions for the project.”

There is more to the differences between AC and DC cables than the way the electricity is transmitted along them – AC cables for connections between wind farms or from wind farm to land use a material called cross-linked polyethylene, or XLPE, but its capacity is limited to about 300kV. At higher voltages, up to about 500kV, a technology called mass-impregnated cable is used, which uses oil-impregnated paper as an insulating material.

Mass-impregnated cable is much more expensive than XLPE, Corbett says, so the industry is constantly trying to increase the voltage that can be carried by XLPE cables.

“The Holy Grail for the supergrid is a 500kV XLPE cable – it would make it much cheaper,” Corbett says. However, “the cable industry is not one where things happen
overnight,” points out Gerace. “The technology is pretty much the same as it was 10-15 years ago.” Indeed, mass-impregnated cable has been around since 1895.

“Land-based grids are congested and it is difficult to build new ones. Grid operators are also being forced to think about Europe in a wider context as a result of EU reforms to electricity markets.”

Key to any reform of electricity market – and to the fortunes of the cable companies – are interconnections between different countries. ABB built the €600m 1GW BritNed interconnector between the UK and the Netherlands and it has recently started cable-laying for a 500MW connection between Ireland and Wales. The UK is also connected to France via a 2,000MW cable, while four Scandinavian utilities and Scottish & Southern Energy are studying the feasibility of building a cable between Scotland and Norway, which is already connected to the Netherlands by a 700MW cable. Earlier this year, Anders Eldrup, CEO of Dong Energy, suggested a link between his company’s native Denmark and the UK, as part of a Europe-wide supergrid.

Nexans is building a €180m interconnection between Finland and Estonia and an €87m link between Norway and Denmark, which are due to be completed in 2013 and 2014 respectively, while the UK North-South Western link and a cable between Italy and Montenegro are out to tender but both due to come on line in 2015. One project looking to avoid many of the pitfalls – and costs – of subsea cables was announced in May. Groupe Eurotunnel and Star Capital Partners plan to build another 500MW link between England
and France using the Channel Tunnel.

Elsewhere, Google is backing an HVDC offshore transmission cable down the Atlantic coast of the US to serve as yet undeveloped wind farms in the US. North America is expected to commission more than 1.1GW of sea-based wind power by the end of 2015 split between the US and Canada, according to Bloomberg New Energy Finance forecasts.

There is even a study under way into the possibility of building a 727-mile cable from Scotland to Iceland to tap into the latter’s geothermal and hydropower potential, which could provide enough power for 5m European homes. The cable would be the longest ever built if the project goes ahead.

Dong, like Mainstream and cable companies Prysmian and Nexans, is a member of the Friends of the Supergrid, an organisation dedicated to creating the policy and regulatory
framework required to enable large-scale interconnection between markets and between different renewable energy projects in Europe.

While there are encouraging signs for a wind-focused supergrid in northern Europe, the cable makers could also benefit from a solar-based grid in the Mediterranean in years to come. The companies are also looking forward to the development of the offshore wind sector in China and North America. However, while China’s industry is likely to be concentrated relatively close to shore, US projects are likely to be further from land, so China’s cable needs will be focused on HVAC while theUS will use more HVDC cables.

The European companies see big opportunities in the US, in particular, where their experience in the North Sea gives them a headstart over local rivals. “There is not that much know-how in HV in the US,” Gerace says. Nexans, ABB and Prysmian are all expanding in theUS, he adds.

The market is concentrated in the hands of a few players, he says, because “HV submarine cables are very high-tech, they take several years to develop and the cost is dramatic. There were not many projects until recently but because of the risks involved in going offshore, everyone wants an established company with experience.”

While the future generally looks bright for the sector, there is one cloud on the horizon. In July, the European Commission issued a Statement of Objections against 12 companies “alleging their participation in a cartel for the supply of submarine and underground power cables and related products and services” following a series of dawn raids in Europe, Japan and South Korea in 2009.

Nexans refused to comment on the situation, but has set aside €200m in provisions, says Peter Willis, head of EU and competition law at law firm Dundas and Wilson. ABB, Prysmian, NKT and General Cable have confirmed they received the Statement, as have Sumitomo subsidiary J-Power Systems and Hitachi Cable in Japan.

While the Statement is not a final decision but a preliminary assessment by the European Commission of the alleged anti-competitive practices, “the great majority of Statements do end up with an infringement decision,” Willis says. If that is the case, as well as facing fines, companies may face legal action from customers to recover the money they have been overcharged as a result of any cartel.

Nonetheless, the future looks bright for the subsea cable sector. “It is not a glamorous sector, but it is sustainable,” says Gerace. “There will always be a need for cables.”